Do less, do better
In the US, the S&P 500 (main US stock market) is back to where it was before President Donald Trump’s ‘Liberation Day’ announced sweeping trade tariffs, which caused the market to fall almost 19% from their February peak. At the time media hysteria went into overdrive with headlines and comment pieces about huge stock market falls, recession fears and the end of globalisation. It was not long before Trump folded and reversed many of the tariffs he had threatened. The market has since concluded that when it comes to trade the President is a TACO (Trump Always Chickens Out – term coined by the FT). It is notable how the recovery has not made headlines, unlike the fall.
Economists agree that the trade tariffs made no economic sense and caused enormous uncertainty. However, our understanding of market history and a steadfast focus on the long term means we do not feel compelled to react to events such as these. The weight of history shows that the market rises over time: the declines are temporary.
Sharp falls and rapid recoveries are not unusual and could be missed by those that only check their investments infrequently. For example, comparing this quarter to the previous quarter valuation hides the tumult of April and May. Missing big movements such as these has the benefit of helping investors stay calm and avoid unnecessary worries.
The evidence suggests that the more frequently investors monitor their portfolio, they become more sensitive to losses than to gains. A myopic short-term focus on market fluctuations will often lead to poor decision making that is detrimental to wealth. There is no right or wrong frequency for checking your portfolio, my own view is that once a year is enough. Investing is a marathon, not a sprint. The goal is long term growth.
Just over a decade ago the asset manager Fidelity were interested in which investors did the best, so they went about analysing thousands of client accounts over a 10-year period. These accounts were then broken down into percentiles. What they found was very surprising, the top performers were dead, and the second-best performers had forgotten they had an account! This and other studies have concluded that there is an inverse correlation between portfolio turnover and portfolio return. Activity is the enemy.
The father of investing, Benjamin Graham once said ‘the investor’s chief problem, even his worst enemy, is likely to be himself.’ Excessive buying and selling, is primarily caused by emotions such as fear, greed, or excitement. Not only is excessive trading costly due to the greater impact of fees and taxes, but the main cost is in failing to capture the investment return. Those that are forever tinkering with their portfolio end up falling into a cycle of return chasing and market timing. This classic behavioural trap manifests in an investment strategy that ‘buys high and sells low’. A guaranteed way to lose money.
Building on this theme fifty years ago, the investor Charles Ellis, came up with an analogy that compared investing to tennis (apt given the time of year). He observed that professional tennis players win matches by hitting aggressive shots. Whereas, amateur players win by keeping the ball in play and avoiding risky shots, thus making fewer unforced errors.
Applied to investing, academics have found that due to costs and market efficiency over 90% of professional fund managers (that engage in active stock selection and market timing) underperform the market. It is therefore clear that a successful investment process must be one that encourages us to make fewer unforced errors.
The investment industry’s entire business model is dependent on investor activity. The menu of potential investments is dizzying; there are almost 5,000 investment funds for sale in the UK, with the vast majority of these being actively managed. It isn’t just a UK problem, globally there are more equity funds than there are listed companies to invest in! Given the plethora of choice, it is no wonder investors trip themselves up. Fortunately using an evidence-based approach to investing allows us to dramatically narrow the range of suitable options by having a strategy driven by key principles, we can better structure portfolios and identify products that deliver the outcomes we desire.
Our investment strategy allows us to focus on what is critically important (asset mix, diversification, index funds) and ignore what is irrelevant and confusing (media, active management). Fewer decisions = fewer mistakes.
James Bacon July 2025